Coverage for Construction Defects Caused by Subcontractor Work

Amanda M. Leffler | Brouse McDowell | September 12, 2017

The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

  • Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
  • Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.

In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.

CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could neverconstitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.

Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages. Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.

New Jersey Denied Property Damage Claims

Nicole Levine | Property Insurance Coverage Law Blog | August 13, 2017

If your home or business is affected by a disaster and you have purchased property damage insurance, you may immediately feel a sign of relief. That relief could be fleeting, upon a discovery that the promptly submitted insurance claim has been denied. Immediately you realize there are statutes and regulations that protect consumers from wrongful denials. Unfortunately, the level of protection will depend on the which of the fifty states your property is located. The insurance industry is regulated by each state, so the protections afforded by law can vary distinctly from state to state.

To encourage uniformity, the National Association of Insurance Commissioners (NAIC) promulgated the Unfair Claims Settlement Practice Act (UCSPA). Regulations were enacted to implement the Act that are generally followed by each state. However, despite this major effort, interest groups in each state have been able to influence and modify the laws, disrupting uniformity across the states.

Each state has an insurance department that regulates their insurance industry. and each state has their own statutes, regulations, and case law on handling insurance claims. Some states offer broad protection for the policy holder while other states afford very narrow, ill-defined protections. I am lucky enough to practice law in one of the states that offer this very narrow, ill-defined protection: New Jersey.

New Jersey, recognizes that an insured can sue an insurer under a breach of contract suit for failure to properly handle and pay an insurance claim. The state also acknowledges that an obligation of good faith and fair dealing is embodied in every insurance policy. This good faith obligation requires the insurer to act fairly and reasonably in processing, investigating, evaluating, and paying a claim. Violating this obligation is often referred to as bad faith. In New Jersey, an insurer is liable for bad faith only where it denies a claim that is not “fairly debatable” and it either knows that is the case or is malicious and reckless in their claim denial. So, in effect, if the insurer can prove that they investigated the claim, the likelihood of a bad faith claim denial finding, in New Jersey, is slim.

Unfortunately, for New Jersey policyholders, wrongfully denied insurance claims are not entitled to the recovery of special damages flowing from that breach. “Special Damages” include but are not limited to consequential economic loss, tort damages such as damages for emotional distress, attorneys’ fees, and possibly punitive damages. Regrettably, in the Garden State a policyholder forced to file a lawsuit and incur the inherent costs associated with such litigation, can never truly be restored to their pre-loss condition.

If you live in New Jersey and your insurer denies or underpays your home or business property damage claim there are options. A qualified, licensed public adjuster can be hired to assist with the preparation, presentation and adjustment of the claim. If it’s an underpayment of a claim and not a coverage issue, the policy appraisal clause can be invoked. If all appeal rights under the policy are exhausted, a complaint can be filed with the Office of Insurance Claims Ombudsman at Finally, an attorney can review the legal merits of the case and advise accordingly.

Seventh Circuit Confirms Additional Insured’s Coverage for Alleged Construction Defects

Tred Eyerly | Insurance Law Hawaii | August 9, 2017

The Seventh Circuit held that the underlying complaint alleged an occurrence by asserting that the painting subcontractor was negligent in causing damage to the building. Westfield Ins. Co. v. Nat’l Decorating Serv., Inc., 2017 U.S. App. LEXIS 12516 (7th Cir. July 13, 2017).

McHugh Construction, the general contractor for construction of a 24 story condominium building in Chicago, retained National Decorating Service, Inc. as a subcontractor to perform all of the painting work. This meant National Decorating would paint the exterior of the building with a protective coating that was a waterproof sealant.

After completion, the building’s board of managers sued McHugh, National Decorating, and others for damages resulting from faulty workmanship. The third amended complaint alleged: (1)  significant cracking of the exterior concrete walls, interior walls, and ceilings; (2) significant leakage through the exterior concrete walls, balconies, and windows; (3) defects to the common elements of the building; and (4) damage to the interior ceilings, floors, interior painting, drywall, and furniture in the units.

Westfield was National Decorating’s insurer. McHugh was an additional insured. The policy defined “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Both National Decorating and McHugh tendered to Westfield, who denied the tender. Westfield filed an action for declaratory judgment to determine its coverage obligations. The parties filed cross motions for summary judgment. The district court denied Westfield’s motion and granted the defendants’ motions. Therefore, it was determined Westfield had a duty to defend.

On appeal, Westfield argued National Decorating’s failure to apply a sufficiently thick coat of paint to the exterior of the building did not constitute an “accident” under the policy. Second, Westfield argued that because the damage was to the building itself, the damage was exempted from the policy’s coverage.

The Seventh Circuit disagreed that National Decorating’s actions could not constitute an “occurrence” as a matter of law. Under Illinois law, negligently performed work or defective work could give rise to an “occurrence” under a CGL policy. This was especially true where, as here, the policy defined an “occurrence” to include not only an accident, but also “continuous or repeated exposure to conditions.” Here, the underling complaint alleged that National Decorating was negligent. This was sufficient to satisfy the policy’s occurrence requirement when determining whether there was a duty to defend.

Further, damage to something other than the project itself did constitute an “occurrence.” Here, the parties disputed what constituted the scope of the project. Westfield contended that the project was the entire building and because the damage alleged was to that building, it was excluded from the policy’s scope. The defendants argued that the scope of the project was National Decorating, the Named Insured’s, work. The court agreed with the defendants.

National Decorating was responsible for painting the exterior of the building. The underlying complaint sought to recover for damages incurred to other portions of the building, not just the exterior, which was allegedly coated with an insufficient amount of paint. It would be illogical to conclude that the scope of the project for which National Decorating contracted was the entire building.

Westfield also argued that from a public policy perspective, finding that there was a duty to defend under a subcontractor’s CGL policy would obviate the need for a general contractor or developer to carry its own coverage. The court was not impressed with this argument, noting that coverage would only be available for damage caused to the building as a result of an “occurrence” caused by the Named Insured’s work. Therefore, the policy required a clear connection between the damage and the subcontractor’s work.

Consequently, the district court’s grant of summary judgment for the defendants was affirmed.

Use It or Lose It: California Court of Appeal Addresses Statutes of Limitations for Latent Construction Defects and Damage to Real Property

Omar Parra and Jesse M. Sullivan | Haight, Brown & Bonesteel | August 2, 2017

The First Appellate District of the California Court of Appeal recently confirmed California’s latent defect statute of limitations, codified in California Code of Civil Procedure section 337.15, bars only claims based on construction defects. Estuary Owners Association v. Shell Oil Company, No. A145516, (Cal. Ct. App. July 26, 2017). The Court also reemphasized that under California’s three-year statute of limitations for damage to real property, delineated in California Code of Civil Procedure section 338(b), the actual and constructive knowledge of the prior landowner is imputed to the current landowner.

Estuary Owners Association concerned the development and construction of a 100-unit condominium by Signature at the Estuary, LLC (“Signature”) on land Shell Oil Company (“Shell”) previously used as a fuel distribution terminal. Construction of the condominiums was completed in 2006. In 2008, it was discovered that residual concentrations of petroleum related chemicals remained in the soil, soil gas, and groundwater beneath the development. Later that year, Signature revealed that the condominiums had been constructed with moisture barriers beneath the building slabs instead of the vapor/gas barriers called for in the corrective action plan.

In 2010, the Estuary Owners Association (“EOA”) and other homeowners filed three separate complaints against the project’s developers, design professionals, subcontractors, and prior owners, including Shell. The complaints alleged, among other things, that the defendants knew of the soil and groundwater contamination, failed to adequately remove and clean the contamination, and failed to properly construct the vapor/moisture barriers underneath the slab. The complaints were eventually consolidated into a single action. As to Shell, the EOA sought recovery under theories of negligence, negligence per se, private nuisance, and public nuisance.

Shell eventually moved for summary judgment against EOA. Most relevant to the issues on appeal, Shell argued: 1) all of EOA’s causes of action were barred by the 10-year statute of limitations for latent construction defects; and 2) all of EOA’s causes of action were barred by the 3-year statute of limitations for damage to real property. The trial court agreed and granted Shell’s Motion for Summary Judgment. EOA subsequently appealed.

On appeal, EOA’s argument was two-fold. First, it argued that the trial court misinterpreted its complaint as alleging only a construction defect, when, in fact, its allegations were that its injuries were caused by Shell’s negligent actions after the fuel distribution terminal was completed. EOA asserted, therefore, the latent construction defect statute was inapplicable in this matter. Second, EOA argued its allegations concerned “new and different” damage to their property, which they did not learn was caused by Shell until 2008 or later. Consequently, because EOA filed its complaint in 2010, their claims against Shell were timely.

As to EOA’s first point, the Court of Appeal agreed that section 337.15 did not apply, and therefore reversed the trial court’s ruling on this issue. In doing so, the Court made a critical interpretation with respect to the latent construction defect statute: “section 337.15 can bar only claims alleging injury caused by latent construction defects.” The Court reasoned section 337.15’s “protection applies to claims for damage due to defects in how an improvement was designed and constructed, not to claims based on how the improvement was used after its construction is complete.” Applying this principle to the facts before it, the Court held Shell’s Motion for Summary Judgment cannot be granted on the basis that EOA’s claims were barred by section 337.15 since EOA’s construction defect allegations, albeit sloppy, pertained to the condominiums, not to Shell’s fuel distribution terminal.

EOA received a less favorable outcome as to its second point. On this issue, the Court affirmed that a cause of action for damage to real property accrues when there is “actual and appreciable harm” to the property. The Court further emphasized that, while the limitations period to present such an action may be tolled until the plaintiff discovers or should have discovered all facts essential to her claim, the actual and constructive knowledge of the prior landowner is imputed to the current landowner and the transfer of ownership does not restart the limitations period. Guided by these conventions, the Court found the “new and different” harm alleged by EOA was not, in fact, sufficiently or fundamentally different to warrant a new limitations period – that is, the damage EOA claims arises from the same contamination. The Court, therefore, imputed Signature’s knowledge of the harm, which occurred in 2002 at the latest, to EOA. Thus, the Court affirmed the trial court’s ruling that the EOA’s actions were barred by the three-year statute of limitations for damage to real property.

Estuary Owners Association reinforced two well-established principles: 1) section 337.15 can bar only construction defect claims; and 2) causes of action for damage to real property belong to the landowner who discovered or should have discovered the damage. The Court’s opinion, therefore, provides an important reminder for the plaintiff and defense bar alike to carefully scrutinize the facts and plead timely and accordingly. As EOA learned, ambiguous and late allegations can end a case short of trial.

This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice.  This communication may be considered advertising in some jurisdictions.

The Importance of Careful Coverage Analysis

Heather Howell Wright | Bradley | July 2017

Ohio has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims made by a project owner for property damage allegedly caused by the defective work of a subcontractor. In Ohio Northern Univ. v. Charles Constr. Serv., Inc., an Ohio appeals court found coverage. It distinguished a 2012 decision of the Ohio Supreme Court, Westfield Ins. Co. v. Custom Agri Systems, Inc. that seemed to hold, broadly, that “claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.” A close comparison of the two cases reveals their consistency and demonstrates that the “devil is in the details” of any coverage analysis.

Coverage for Defective Work

Most commercial general liability policies are written on standardized forms developed by the Insurance Services Offices. The standard general liability policy provides that it applies to “property damage” caused by an “occurrence.” Whether faulty or defective workmanship constitutes an “occurrence” under the general liability policy is a state specific question, and courts across the country are divided on this issue. While some states have held that faulty workmanship or improper construction is not an “occurrence” because it can never be an “accident,” others have held that faulty workmanship can be an “accident” if the resulting damage occurs without the insured’s expectation or foresight. The recent trend has been for courts to find that construction defects or faulty workmanship satisfy the “occurrence” and “property damage” requirements under a general liability policy, and that losses sustained as a result of such defects may be covered.

The Ohio Cases

Ohio Northern University (the “Owner”) contracted with Charles Construction Services, Inc. (the “Contractor”) to build a luxury hotel and conference center on the Ohio Northern campus (the “Project”). The Contractor subcontracted most of the work to various trade and supplier subcontractors. After construction was complete, the Owner discovered evidence of water intrusion and moisture damage to wall coverings, dry wall, and insulation. Remediation of the damage led to the discovery of additional structural defects.

The Owner sued the Contractor, who, in turn, filed claims against its subcontractors. The Contractor’s insurer, The Cincinnati Insurance Company (the “Insurer”), intervened in the lawsuit and sought a declaration that it had no obligation to defend or indemnify the Contractor. In a motion for summary judgment, the insurer relied on the Ohio Supreme Court’s decision in Custom Agri to support its claim that it had no duty to defend or indemnify the Contractor. The trial court held in favor of the insurer holding that, under Custom Agri, defective construction was not an occurrence and, therefore, that there was no coverage.

On appeal, the Court of Appeals explicitly rejected the Insurer’s argument that Custom Agri stood for the “expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a [general liability] policy because such claims” can never constitute a claim for “property damage” caused by an “occurrence” under a general liability policy. The Court of Appeals noted that, unlike Custom Agri, the property damage sustained by Ohio Northern was caused by the defective work of subcontractors, not by the work of the insured Contractor. Moreover, the property damage occurred after the project was completed. Thus, the property damage was within the “Products-Completed Operations Hazard,” and the insured Contractor had paid supplemental premiums to obtain “Products-Completed Operations Hazard” coverage. In considering each of these facts, the Court of Appeals reversed the trial court’s entry of summary judgment for the Insurer.


Comparison of these two Ohio cases demonstrates the necessity of conducting a close review of the facts and procedural posture of any coverage case to identify possible bases for establishing coverage.